CBN Finally Agrees to Free the Naira, Funds Forward Contracts

Following the pressure mounted by the financial markets and analysts on the Central Bank of Nigeria (CBN) to allow the naira to be truly market-determined so as to attract offshore investors who have continued to remain on the sidelines, the CBN has finally freed the nation’s currency so that its rate on the Nigeria Interbank Foreign Exchange (NIFEX) will be determined by the interplay of demand and supply.

The central bank will equally fund the one-month forward contracts of $697 million this week, meaning that authorised dealers that bid on behalf of their customers for the contracts last month would be making a kill of almost N10 to the dollar, given that the naira fell to N292.25 on the interbank market last Friday.

On the first day of trading under the revised rules for the NIFEX on June 20, the CBN had intervened in the market through the Special Secondary Market Intervention Sales (SMIS) to clear the backlog of  $4.02 billion pent-up demand for FX.

According to the CBN, it sold $532 million on the spot market and $3.487 billion in the forwards market.

A breakdown of the $3.487 billion forward sales by the central bank showed that $697 million was for one month (1M), $1.22 billion for two months (2M) and $1.57 billion for three months (3M).

On the full liberalisation of the interbank FX market, THISDAY learnt that pressure was brought to bear on the CBN when it was discovered that since the launch of the revised rules for the NIFEX market last month, the CBN through its interventions had pegged the naira within the range of N281-N284/$.

A banking industry source informed THISDAY that the central bank retained the peg despite announcing that it had floated the naira because of the continuing opposition by President Muhammadu Buhari to the devaluation of the Nigerian currency.

He said: 

“President Buhari only sanctioned the introduction of the flexible exchange rate regime when he saw the damning data released by the NBS showing that the Nigerian economy had contracted in the first quarter of this year and had effectively slumped into a recession.

“He was a very reluctant convert, so when he expressed his opposition again after the market had been partially liberalised, the CBN slammed the breaks on the naira and started pegging it again.

“But pressure was mounted on the central bank to allow the naira find its true level because offshore investors had taken note and refused to bring their money, thus exacerbating the FX scarcity in the market which the flexible exchange rate regime was meant to resolve.”

Signalling the move towards a proper free float of the naira, THISDAY learnt from treasurers of some of the commercial banks that the central bank held a conference call on Friday with authorised dealers in the FX market, during which the information was communicated to them.

Also, just as the conference call was taking place, the CBN Governor, Mr. Godwin Emefiele, was at a lunchtime meeting with investors in London, where he was said to have told foreign investors that the flexible exchange rate would now operate fully.

A source, who was at the London meeting, said what they gathered from the meeting with Emefiele was that banks were now free to set pricing at a level where supply would match demand for forex.

The central bank anticipates that this new policy would encourage those that have forex to bring it and sell, now that they can get more naira.

As a result of the development, banks made higher bids for forex on Friday, thereby leading to a depreciation of the naira.

Indeed, the naira depreciated against the United States dollar across all FX market segmentson Friday. On the interbank market, it fell to an all-time low of N292.25 to a dollar and depreciated at the Bureau De Change and parallel market segments by 2.9 per cent and 3.13 per cent to N355/$1 and N365/$1 respectively, as demand at the interbank market spilled over to the alternative market segments.

Speaking in a phone interview with THISDAY, the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, welcomed the decision to finally allow market forces to determine the value of the naira, saying: “It is about time they did the real thing.”

“Every other thing they were doing was to a large extent a rigged system under the flexible exchange rate system. That did not allow the naira to find its true equilibrium.

“You intervene in the market and naira finds its price. Then you intervene to influence that price. You don’t set a price by starting an intervention before the price emerges. By doing that, you will not know whether you are supporting the currency at an unsustainable rate.

“To me, I am relieved that finally we have gotten to this point. I understand it was done out of pressure from the international community. I learnt international investors said they were not going to do anything with us until we show some seriousness.

“So I think it is the most welcome development since this forex regime started. Now, you are going to see the parallel market depreciate initially, and then appreciate significantly and the difference between the parallel and interbank market would narrow.

“This will also solve the problem of dollar liquidity in the market because a lot of people would bring dollars in officially. Before, people were taking it to the parallel market. So there would be much more supply.”

A currency analyst at Ecobank Nigeria, Mr. Kunle Ezun also predicted that the naira might depreciate to about N350 to a dollar on the interbank market this week, just as he aligned with Rewane, saying: “That is what they should have done when they introduced the flexible exchange rate policy.”

“The central bank ought to have allowed the naira to find its level, and then it would appreciate gradually to about N280 to a dollar. Foreign investors were not comfortable with the N280 to a dollar, considering what the value of the naira is on the parallel market.

“With this now, the CBN would still be intervening as a player in the market, but not as frequently as we have seen since the new guidelines for NIFEX were introduced,” he added.

According to Ezun, if the naira is allowed to trade freely and reflect its true value, foreign investors would come in droves.

He added: “If we say we are operating a flexible exchange rate regime, we should allow the market to trade to reflect the level of liquidity in the market, which is between N300/$1 and $350/$1, then over time, with inflows from foreign investors, the naira may appreciate to about $250 to a dollar. But it shouldn’t be a controlled rate.

“A lot of people believed that the CBN was controlling the market at an interbank rate of around N280 to a dollar. So with what the CBN has done, there is no restriction on the 50 kobo spread between the bid and offer again. This means banks can trade based on what they have.”

The Emir of Kano and former CBN Governor, Alhaji Muhammad Sanusi II, last week said the flexible exchange rate regime was not being fully implemented, just as he warned that targeting a pegged rate would not resolve the current FX problem.

He urged the central bank to allow the forces of demand and supply to determine the true value of the nation’s currency, in line with the flexible exchange rate policy.

“There is a fantastic document by the central bank on the flexible exchange rate. We need to implement that document properly. So long as the implementation is not total and faithful to the document itself, you would have residual market risks.

“You have to let the market decide where the naira is going to be to start with, before inflows come in and then when the inflows are in, you have an appreciation of the naira.

“So you have to live with a devaluation to N300/$1 plus and then it will firm up to N270/$ or N280/$1 or whatever. But so long as you target a rate of N280/$1, you are just moving the peg,” he had argued.

He, however, pointed out that with the new forex policy, the central bank was able to reduce the arbitrary opportunities in the market as well as improving its liquidity.

Emefiele flew to Britain and the United States on a road show last Friday to try to lure investors. Investors had welcomed the move but many said they were steering clear until the economy shows signs of concrete recovery.